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Are NRIs Taxed on Their Income Earned in India

26 Jul 2023

Are NRIs Taxed on the Income Earned in India?

  • Are you an NRI (non-resident Indian) who lives abroad but earns an income in India? If yes, then you must have wondered about your tax obligations in India.
  • Understanding the tax implications of income earned in India is crucial to ensuring legal compliance and avoiding legal complications. 
  • This article will explore whether NRIs are taxed on their income earned in India and also discuss possible tax deductions.

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How to Determine Your Residential Status?

Before we dive into the taxation aspect, it's essential to determine your residential status. The Indian Income-tax Act, 1961, categorises individuals into the following residential status categories:

  • Resident: An individual is considered a resident if he stays in India for 182 days or more during a financial year. He will also be considered a resident if he stays in India for 60 days or more during a financial year and has been in India for at least 365 days during the four preceding financial years.
  • Non-resident: An individual is considered a non-resident if he doesn't live in India for at least 182 days in a financial year.
  • Resident but not ordinary resident (RNOR): The RNOR category applies to those who qualify as residents but do not meet the criteria to be considered 'ordinary resident'. The RNOR status generally applies to individuals who have been non-residents in India for nine out of the 10 preceding financial years or have spent less than 729 days in India during the preceding seven financial years.

Which Income is Taxable for NRIs?

For NRIs, the nature of the income earned in India determines its taxability. Some of the key types of taxable income categories for NRIs include:

  • Capital gains: Any gains from the sale of assets, such as property or mutual funds, are considered taxable capital gains for NRIs. The taxation rate on long-term capital gains for NRIs is 20%, whereas short-term capital gains are taxed as per the applicable slab rates.
  • Salary: The salary an NRI receives for services rendered in India is taxable, and the tax liability depends on his income level.
  • Rental income: The income earned from renting out property in India is taxable. Thus, NRIs are required to report their rental income and pay tax on it as per the applicable tax rates.
  • Income from business: Income earned from a business set up or one managed by an NRI in India is taxable. It's taxed as per the respective income tax slab rates.
  • Other sources: For NRIs, the interest earned on fixed deposits and savings accounts in Indian banks is taxable. Thus, the interest income is added to the taxable income and is taxed at the applicable rates.

What are Some Tax Deductions Available for NRIs?

Like residents, NRIs are also eligible for various tax deductions and exemptions available under the Indian Income-tax Act. Some of the tax exemptions that NRIs can avail of are as follows:

  • Deduction for health insurance premium: NRIs can claim tax deductions up to Rs. 50,000 against the premiums paid towards health insurance policies for themselves, their spouse, and dependent children under Section 80D of the Indian Income-tax Act. 
  • Deduction under Section 80C: NRIs can claim deductions up to INR 1.5 lakh by investing in specified instruments, such as life insurance premiums, employees' provident fund (EPF), public provident fund (PPF), national savings certificates (NSC), and five-year fixed deposits with banks.
  • Deduction in home loan interest: NRIs can claim a standard exemption of 30% on the interest paid on home loans under Section 24(b) of the IITA.

Conclusion

  • To summarise, NRIs are subject to taxation on their income earned in India, depending on their residential status and the nature of the income.
  • It's crucial for NRIs to be aware of their tax obligations and ensure compliance with Indian tax laws.
  • Consulting a tax professional or seeking expert advice can help them navigate the complexities of Indian tax regulations and optimise their tax planning strategies.

 

Related Articles: How does NRIs trade in the Indian Stock Markets? | What NRIs must know about investing in mutual funds in India..?

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